Category Archives: attorneys

In the aftermath of the Love Canal dump site debacle in 1980, Congress enacted the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) – commonly known as the Superfund Law. Under this law, any owner or operator of a contaminated site is held strictly liable for cleaning up the site. Strict liability means all government has to do is to show that you are the land owner.

This law put landowners who unknowingly purchased contaminated property at risk for the clean up costs. In 1992, Congress amended the Superfund Law to include an “innocent Land Owner” defense (ILO) against Superfund liability. ILO defense basically says that if a purchaser conducts environmental due diligence BEFORE completing the sale, he will get some protection from Superfund liability if the commercial property he purchases turns out to be contaminated.

The due diligence process for the prospective land owner is codified in the Federal Regulations as All Appropriate Inquiries (AAI). AAI is also commonly referred to as Phase 1 Environmental Assessment. To qualify for the exemption, the AAI must be performed by an Environmental Professional (EP) or under his direct supervision. The qualifications of an EP are also codified in the federal regulations.

The AAI requires the following:

Interviews with past and present owners, operators and occupants;

Reviews of historical sources of information;

reviews of federal, state, tribal and local government records;

visual inspections of the facility and adjoining properties;

obtain commonly known or reasonably ascertainable information; and

degree of obviousness of the presence or likely presence of contamination at the property and the ability to detect the contamination.

searches for environmental cleanup liens;

assessments of any specialized knowledge or experience of the prospective landowner;

an assessment of the relationship of the purchase price to the fair market value of the property, if the property was not contaminated; and

commonly known or reasonably ascertainable information.

A professionally prepared Phase 1 report that meets the AAI requirement will general cost the prospective landowner several thousand dollars or more depending on the size and history of the commercial property.

Unfortunately, due to the economic downturn and various other reasons, Phase 1 mills are popping up everywhere. These are firms or sole proprietors that charge $800 or less to “perform” a Phase 1 assessment for a commercial site. Many buyers, lenders (banks) and sellers are hiring these mills because of the low costs.

What they do not understand is that they are putting themselves in great jeopardy in terms of Superfund liability. They may think that the $800 Phase 1 report will provide the necessary shield against future cleanup cost. But they would be wrong.

Here is what could happen when these low cost phase 1 mills are involved:=

If the seller gives the buyer one of these deficient reports as evidence of “clean health” on the property, the seller can be sued in court for misrepresentation.

If a lender pays for one of these reports and gives it to the buyer and approves the loan, the lender can be sued by the buyer if the property turns out to have contaminations that were missed in the report.

The buyer may not be able to use his $800 report to claim his ILO exemption because the AAI procedures were not followed.

Just how bad can some of these Phase 1 mill reports get? Here is an example:

A consultant was hired to perform an AAI on a commercial property located in the state of Illinois. His report consists of the following:

6 pages of scope of work and limitations
5 pages from the Illinois Soil Conservation Transect Survey Summary
11 photos without any annotations
13 pages of definitions including one that states that UST means underground storage tank!
17 pages of hydrogeology data from a county in Wisconsin bearing the same name as the county (where the site is located) in Illinois.

The meat of the report consists of ONE single page of record review and HALF a page on site reconnaissance. It was capped off by one page of recommendation and final opinion and a signature. The investigation completely missed the presence of a leaking underground storage tank. There were no review of Sanborn maps and hardly any review of agency records.

This entire report could have been written in an hour with a 15-minute coffee break thrown in.

The adage “you get what you paid for” is never more true. It is highly doubtful that the new owner would be able to claim his ILO defense. To obtain exemption from Superfund liability, you cannot have a deficient Phase 1 report. It simply will not get you the protection that you want.

There are also a growth of database companies offering banks and buyers “desk top” reviews of historical environmental records. There is nothing wrong with these desk top reviews as long as they are done as part of the site investigation. It is a mandatory requirement under AAI that the EP conducts a physical site visit. No Phase 1 report is complete without that.

A note of caution here. Just because you pay a lot of money for a report does not necessarily mean your report will not be deficient. You may be paying a lot of money to a big consulting firm that employs recent college graduates to do most of the work. On any given day, you will see advertisements from large consulting firms looking for “environmental professionals” with zero to 2 years of experience to work on environmental site assessment projects.

No person with zero to 2 years of experience (even with a college degree) can qualify under the federal definition of an EP within the AAI program. The key question is: are these individuals being properly supervised?

A recent Michigan case illustrates the risks associated with the failure to conduct proper due diligence. In Alfieri v. Bertorelli, 2011 Mich. App. LEXIS 1796 (Mich.Ct. App. 10/18/11), the buyers purchased a condominium unit in a former factory building as an investment. The factory had been impacted with trichloroethylene (“TCE”) from its former use. A newspaper article and the real estate agent’s sales brochure indicated the site had been remediated despite the fact that the state agency had advised the realtors that the sales brochure was inaccurate and misleading. The buyers relied on the newspaper article and the sales brochure and did not perform their own due diligence before closing the deal.

The property turned out to be heavily contaminated. The buyers subsequently filed a lawsuit against the real estate agents on theories of silent fraud and negligent misrepresentation. The jury found that the agents engaged in negligent misrepresentation. However, the jury also determined that the buyers were partially responsible for their damages because they had failed to perform their own due diligence. The jury assigned the buyers 35% fault on the negligent misrepresentation claim.

According to noted New York environmental attorney and law professor Larry Schnapf: “An owner could lose its ILO defense and be on the hook for a cleanup if the phase 1 did not identify contamination”. His website http://www.schnapflaw.com/ lists many recent cases where courts ruled against land owners because of poorly prepared due diligent reports.

Moral of the story: Buyers beware and hire qualified EP to do due diligence.

One of the attorneys I met on LinkedIn posted this little story. I am reproducing it here as a great teachable moment.

During the French revolution three prominent, but very unfortunate, professionals were condemned to beheading by the guillotine: a priest, a doctor, and an engineer. The three were conveyed to the scaffold together in an old ox cart and were marched up to the guillotine together amidst amass of cheering blood thirsty spectators. The priest was the first to meet his fate. The executioner very politely asked the priest if he preferred to avoid seeing the blade fall by lying face down rather than face up. The priest replied, “I’ve led a good life, have nothing to regret, and want to meet my maker face-to-face.” So the priest lied down facing the blade. The executioner pulled the cord releasing the blade and it plummeted toward the priest’s exposed neck. But within a half inch of reaching its fatal destination the blade stopped literally in its tracks. The crowd roared with delight and many of the onlookers fell to their knees in prayer. Not wanting to put any victim to double jeopardy the authorities released the priest, to the great delight of the crowd. Then came the doctor’s turn. He was asked the same question and thought “if it worked for the priest maybe it will work for me too,” so he requested to take the blade face up. Again the blade stopped a half inch from the target, and as with the priest, the authorities released the doctor. Now was the engineer’s turn and, being no one’s fool, he also opted to take the blade face up. As he lay with his neck firmly placed in the crook of the guillotine and looked up to his maker, and to the blade, he exclaimed, “Ooh, I think I see your problem.”

Moral of the story: Only answer the question that’s asked, and don’t volunteer information, your neck may be at stake, and in the case of this discussion, your client’s neck!

Remember this story next time when you are being deposed or when you are speaking with an inspector.

In my last blog, I discussed the factors an agency such as EPA would use to determine if it wants to proceed with criminal investigation. That’s step one of a two-step process. Once an agency completes its investigation, it may then refer the case to the prosecutors for prosecution.

Will the prosecutor exercise its prosecutorial discretion? That’s the second step.

The best way to demonstrate how a prosecutor decides whether to prosecute a case or not is by the following example of a tale of two companies. The US Department of Justice issued a memo some time ago outlining the factors a US Attorney should consider in targeting a company for criminal prosecution of environmental crimes.

The memo gives the examples of two companies – Company A and Company Z. A tale of two companies.

Here is what Company A does:

1. It regularly conducts a comprehensive audit of its compliance with environmental requirements.

2. The audit uncovered as information about employees disposing of hazardous wastes by dumping them in an unpermitted location.

3. An internal company investigation confirms the audit information. (Depending upon the nature of the audit, this follow-up investigation may be unnecessary.)

4. Prior to the violations the company had a sound compliance program, which included clear policies, employee training, and a hotline for suspected violations.

5. As soon as the company confirms the violations, it discloses all pertinent information to the appropriate government agency; it undertakes compliance planning with that agency; and it carries out satisfactory mediation measures.

6. The company also undertakes to correct any false information previously submitted to the government in relation to the violations.

7. Internally the company disciplines the employees actually involved in the violations, including any supervisor who was lax in preventing or detecting the activity. Also, the company reviews its compliance program to determine how the violations slipped by and corrects the weakness found by that review.

8. The company discloses to the government the names of the employees actually responsible for the violations, and it cooperates with the government by providing documentation necessary to the investigation of those persons.

According to DOJ, Company A would stand a good chance of being favorably considered for prosecutorial leniency, to the extent of not being criminally prosecuted at all.

At the opposite end of the scale is Company Z, which does the following:

1. Because an employee has threatened to report a violation to federal authorities, the company is afraid that investigators may begin looking at it. An audit is undertaken, but it focuses only upon the particular violation, ignoring the possibility that the violation may be indicative of widespread activities in the organization.

2. After completing the audit, Company Z reports the violations discovered to the government.

3. The company had a compliance program, but it was effectively no more than a collection of paper. No effort is made to disseminate its content, impress upon employees its significance, train employees in its application, or oversee its implementation.

4. Even after “discovery” of the violation the company makes no effort to strengthen its compliance procedures. For example, If the company had a long history of noncompliance, the compliance audit was done only under pressure from regulators, and a timely audit would have ended the violations much sooner, those circumstances would be considered.

5. The company makes no effort to come to terms with regulators regarding its violations. It resists any remedial work and refuses to pay any monetary sanctions.

6. Because of the noncompliance, information submitted to regulators over the years has been materially inaccurate, painting a substantially false picture of the company’s true compliance situation. The company fails to take any steps to correct that inaccuracy.

7. The company does not cooperate with prosecutors in identifying those employees (including managers) who actually were involved in the violation, but it resists disclosure of any documents relating either to the violations or to the responsible employees.

Under these circumstances, leniency by the DOJ is unlikely.

The only positive action by Company Z is the so-called audit, but that was so narrowly focused as to be of questionable value, and it was undertaken only to head off a possible criminal investigation. Otherwise, the company demonstrated no good faith either in terms of compliance efforts or in assisting the government in obtaining a full understanding of the violation and discovering its sources.

A few days ago, BP signed a Consent Decree with the Department of Justice and agreed to pay $13 million for various Risk Management Plan violations under the Clean Air Act at its Texas City refinery. If you recall, there was a major incident at that refinery back in March of 2005 where 15 people were killed.

Thus far, BP has paid $137 million in fines which includes $50.61 million to OSHA for Failure to Abate violations under OSHA’s Process Safety Management standards. It has also spent $1.4 billion in corrective action. The OSHA fine is the largest fine in OSHA’s history.

BP conducted many internal environmental and safety audits before the March 2005 incident. Many safety and environmental issues were raised but little or no action was taken – according to the Chemical Safety Board investigators.

In my last post, I presented the U.S. Chemical Safety Board’s finding about one of the contributing factors that lead to the death of 5 contractors. Apparently, the Board was not very happy with the way Xcel conducted itself during the Board’s investigation. Here is a letter the Board sent to the CEO of Xcel expressing its displeasure.

The company actually went to federal court to try to block the release of the CSB report and its request was denied by the federal judge. The company is currently under criminal prosecution.

Of all these 12 key elements, three of them are paramount. The first one is accountability. For an EMS to be effective it must have accountability. There must be a system within which bad behaviors by employees are penalized and environmentally proactive actions are rewarded. Without accountability on both end of the spectrum, employees may falsify reports due to fear of management retribution. There would be no incentive for employees to identify environmental problems and suggest solutions.

The second key element of an EMS is program evaluation and improvement. An effective EMS must provide for periodic independent auditing of environmental functions with well defined procedures to correct any deficiencies that are uncovered in the audit. It is pointless to go through an elaborate auditing process if there’s not going to be a well -defined set of procedures to follow through with remedial actions. Without follow through, the audit would just be a meaningless paper exercise. Read my earlier post on what happens when you fail to implement your own audit findings. By the way – do not use audits to establish an attorney-client privileged condition in order to hide environmental noncompliance. This will not work since only the actual audit report itself is protected under attorney-client privilege and not the underlying facts.

The third major key element is thorough investigation of any environmental incident in a timely manner. An effective EMS should immediately trigger a thorough investigation when an environmental incident occurs. Such investigation should be designed to find the root causes of the incident and to demonstrate promptness and completeness in your responses to the incident.

One last point: Whatever environmental management system you may use, it needs to be enforced by management at all levels. Like all environmental plans, your EMS must be performance-based. Having a well written EMS document is just a start. It is meaningless if it is not communicated to all your employees and enforced throughout the organization.

One of our readers made the comment that a recent Harvard/Georgetown University study on EPA’s Self-audit Policy shows that it may not be good for all companies.

Below is a brief summary of the Harvard/Georgetown findings from the reader’s website:

“Our results … demonstrate that Audit Policy participants with clean past compliance records improved their environmental performance by reducing their accidental releases of toxic chemicals to the environment. We also find that regulators rewarded these effective self-policers with an inspection holiday. By contrast, bad apple self-disclosers did not improve their performance compared with similar non-disclosing firms. We find no evidence that regulators altered their scrutiny over these ineffective self-policers.

… it turns out that regulators are quite adept at … sorting the good apples from the bad. We found that regulators had accurately parsed these two groups of self-disclosers, rewarding the former but not the latter with inspection holidays.

… self-disclosing firms on average reduce the number of abnormal events resulting in toxic chemicals being released to the environment.”

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My comments on this study are as follows:

The study is flawed in its basic premise. It presupposes that a company undertakes the self audit because it expects an “inspection holiday” AND improved performance. Quite the contrary – the MAIN focus and reason for a company to go the self-audit route with EPA is to secure substantial penalty waiver and avert possible criminal sanction in the face of uncovered environmental violations. The subsequent improvement in environmental performance is a natural byproduct and bonus as a result of the remedial action following the self disclosure.

The study also finds out that “self disclosing firms on average reduce the number of abnormal events”. Well – the reason is very simple. They have few is because they perform audits! They discover small problems before they become major abnormal events. Nothing new here. That’s why people do environmental audits.

As to the “inspection holiday” – you do not need a Harvard study to discover that a regulatory agency carries out more inspections on the bad apples. It is common sense and it happens in the real world. Agencies generally do not waste their limited resources on good apples. Why would they? They can get a much larger return by going after the dirty companies. Again, nothing new here.